Revenge is a bad business plan, Newfoundland

John Crosbie never met a hyperbole he couldn't top. But the former Tory cabinet minister, whose colourful metaphors kept the House of Commons entertained during his stints in the governments of Joe Clark and Brian Mulroney, was barely exaggerating when he recently called the 1969 Churchill Falls hydro contract between Quebec and Newfoundland "one of the greatest public policy disasters entered into by any province or government in the history of Canada."

More than four decades later, the deal signed by the legendary (and first) Newfoundland premier Joey Smallwood remains the source of such bitterness on the Rock that it's a miracle Ottawa hasn't had to send troops to patrol the still-disputed Quebec-Labrador border. Hydro-Québec has the right to purchase all but a fraction of the 5,400 megawatts from the massive Churchill Falls project in Labrador for next to nothing until 2041.

In 1969, the deal didn't seem so lopsided. Nuclear power was all the rage and many analysts predicted that Quebec, which had no need for power it could only transport by building hundreds of kilometres of never-attempted transmission lines, would end up losing its shirt.

Story continues below advertisement

Boy, were they ever wrong. If Quebec is the electricity oasis it is today, it's because the windfall profits from Churchill Falls allow it to sell cheap, emissions-free power to industrial users. Countless billions of investment dollars in the province have been based on this singular premise.

Naturally, this sticks in the craw of Newfoundlanders. Short of renegotiating the original deal, which Quebec has refused to do, the path to reconciliation involved the joint development of the the remaining 3,000 MW of hydro potential on the lower Churchill River.

Instead, Newfoundland is going it alone with a $7.7-billion project to build a 824-MW hydro generating station at Muskrat Falls on the lower Churchill. Stonewalled by Quebec's refusal to transport the energy on its transmission lines on acceptable terms, Newfoundland aims to get the power to customers on the Rock, in Nova Scotia and (maybe) beyond, via costly underwater cables. The federal government has provided a loan guarantee to backstop project.

For Mr. Crosbie, Muskrat Falls is "the last and best chance we have to overcome the disastrously unfair provisions of the original Upper Churchill agreement." For Newfoundland Premier Kathy Dunderdale, "the agenda won't be set by Quebec in terms of how we do our work, how we develop our resources and how we access markets."

Such talk goes over well in Newfoundland. But revenge is a risky business strategy. Muskrat Falls will generate power at a cost that makes wind energy look reasonable, about 15 cents per kilowatt-hour. By comparison, Hydro-Québec pays 0.24 cents/kWh for Churchill Falls power.

Nova Scotia utility Emera wants to build a $1.5-billion transmission line under the 180-kilometre-wide Cabot Strait in exchange for 170 MW of Muskrat Falls power. But the Nova Scotia Utility and Review Board said this week it would approve the deal only if Emera secures guaranteed amounts of additional Muskrat power at "market" rates. Given the glut of natural gas in the United States, those rates currently hover at less than five cents per kWh.

What's more, Hydro-Québec has gone to court to prevent Newfoundland from dictating the delivery schedule of power Quebec receives from Churchill Falls after 2016, when the interprovincial contrat is automatically renewed for 25 years. The Newfoundland plan appears aimed at regulating water levels on the Churchill to favour power generation at Muskrat Falls.

Story continues below advertisement

Story continues below advertisement

Given the risks, two former top Newfoundland bureaucrats, Ron Penney and David Vardy, recently called Muskrat Falls "technically, but not economically, feasible" and warned of "inevitable cost overuns." Other critics suggest it would be smarter for Newfoundland to build gas-fired plants (the province has untapped offshore natural-gas resources) while awaiting the cheap Churchill power that will come its way in 2041 – which, in power project years, is not as far off as it sounds.

Indeed, the best option remains burying the hatchet. Developing the other 2,250 MW of hydro potential on the lower Churchill can't happen without Quebec, since building underwater cables for that much power is out of the question. And Hydro-Québec, whose financial situation has weakened in the face of lower U.S. electricity prices and which stands to lose its main milch cow in 2041, will have an increasing incentive to do a deal with Newfoundland in coming years.

Most Newfoundlanders, however, would probably rather drink cyanide than accept that logic. And in a way, it's hard to blame them.

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.